Tag Archives: lending

On foreclosures fraud, QE and coming new spiral of deflationary forces.


There isn’t anyone at the (nominal) helm who didn’t understood from the very git-go that the only possible way out was a resumption of organic credit growth. All the fraud, lies, deceit, corruption and violation of centuries old jurisprudence were justified (at least in their minds) by national security concerns.

The power-elite have always know that there was a black whole comprised of many different elements, one of which being title insurance, related to challenges in re-securitizing the ponzi. More importantly, they knew that they had at most two years in which to blow another bubble, anywhere/any kind, to get the herd moving once again in a speculative fashion.

Financial Crisis is an ‘Inside Job’.


Having now experienced a confirmed Hindenburg Omen in the last week that portends a stock market decline, we may again try to turn our attention to the Financial Crisis that began in 2007. Inside Job is a documentary by Charles Ferguson that unequivocally reveals to us that the GFC was not an accident. Those who benefited from it foremost were all in on it and new full well what they were doing and what it would lead to.

The Marginal Productivity of Debt.


The key to understanding the problem is the marginal productivity of debt, a concept curiously missing from the vocabulary of mainstream economics. Keynesians take comfort in the fact that total debt as a percentage of total GDP is safely below 100 in the United States while it is 100 and perhaps even more in some other countries. However, the significant ratio to watch is additional debt to additional GDP, or the amount of GDP contributed by the creation of $1 in new debt. It is this ratio that determines the quality of debt. Indeed, the higher the ratio, the more successful entrepreneurs are in increasing productivity, which is the only valid justification for going into debt in the first place.

A sure sign of deflation: 9 bailed-out banks report declines in new lending.


As the pool of credit worthy borrowers and worthy inestment projects dwindles in a deflationary environment so the lending declines. It is no surprise that in still democratic USA, unlike the communist China, the Government cant just mandate its banks to lend. It can provide interest free credit lines, it can embark on a massive Qunatitative Easing and public relations campaings, but if banks are scared to lend and the borrowers are not interested in borrowing nothing will get the lending machine going. At least, not until the bad debts are liquidated through defaults, which are, of course, deflationary. And so the lending contracts.

Sovereign Defaults Coming in Second Stage of the Financial Crisis.


The first stage of the deflationary debt unwind resulted in massive consumer and corporate defaults, particularly in the financial sector. This sector being one and the same as the governments that it controls, the state has thrown all the resources that it had and did not have (pulled them out of thin air) in order to save its Banking sponsors. While it has given the Banks the respite and saved many of them for now from going belly up, it did not solve a thing. The bad debts have simply been transfered to the Central Banks’ balance sheets that are expected to be later transferred to the taxpayers of each and every country. Whatever was not transfered was hidden by suspension of the mark-to-market accounting rules. Thus, the deflation that is not seen has not gone a way, but has been simply hidden.

Dubai default is DEFLATION.


When a debtor reneges on its loan repayment obligations or asks to postpone them this is deflation by definition. The debts that cannot be repayed are defaulted on and so the total debt outstanding in the economy deflates. And what about prices? The prices on real estate in Dubai are down as much as 50% since the beginning of the world financial crisis. So when debt deflation takes hold assets lose value and cause even more defaults. We say that we are in a deflationary spiral then. When it stops is a big question, but given world wide government intervention in free markets this almost assures that the so much needed adjustment will take a long and painful haul. Yet the prices will get to their natural level in spite of all government actions to support them.

One can hope that the Dubai default situation will give a much needed kick to accelerate the process of deflation and wipe out the speculators and their central bank friends.

Here goes Dubai.

Demand deflation.


In a deflationary environment the psychology of economic agents, be it lenders or borrowers, is such that neither is motivated to engage in credit transaction. This is because consumer attitudes in a deflationary environment are leaning towards conservation not expansion and consumption. Thus, making it economically discouraging for business to expand. The deflationary times follow an expansionary period which ends in an oversupply of goods and services, and overcapacity in production that makes them happen.

Japan sees long deflation in US, bets on falling Treasury yields.


“The recovery is very weak and the U.S. is running the risk of deflation…” say the Japanese investors as they are piling into US Treasuries while expecting the yields to drop sharply. They may be the only ones in current economic environment that have extensive experience investing in deflationary times and so it may be worth wile heeding their advice:

“Demand for Treasuries is very good because of the idle money in the banking system…”

“The medium term risk toward inflation is being caused by potential policy missteps by policy makers in regards to monetary and fiscal policy and the weakening dollar…”

“Any economics textbook would tell you that the massive stimulus from the central government will eventually cause inflation, but the Japanese know it doesn’t have to turn out that way…”

“The U.S. economy has faced a double whammy: the recession and credit contraction. The U.S. will face a triple whammy with deflation. That’s good for the Treasury market.”

Mother of all carry trades will lead to inevitable deflationary bust.


For now the privately owned US Federal Reserve’s efforts to reflate the financial markets are sending a flood of liquidity into speculative asset bubble blowing by the speculators. Nearly every asset class is seeing its price being bid up with cheaply borrowed US dollars. At some point an asset bubble always bursts when an event or a perception driven change of heart causes investors to unwind their speculative positions. As the article below explains, when this happens we’ll witness a huge deflationary bust which may wipe out many speculators. Will it wipe out the Central Banks is another good question that only time will be able to answer.

Deflation is firmly taking root in USA. FED is still in denial.


Even though the signs of deflation are everywhere as expressed in contracting credit, money supply, and prices, the privately owned Federal Reserve’s executives continue to beat about the deflationary bush by referring to it as “disinflation” and talking about it in future tense. It has been happenning already for the past year and a half and it will continue as evidenced by record low long term Treasury yields this week. The below article provides a detailed discussion and solid evidence of deflation and how it works.